May 11, 2022

National Security: Review of Outbound Investments?

A new regulatory regime that would limit certain US outbound investments in other countries has been kicked around in Congress and by national security officials in the Biden administration. This Morgan Lewis memo describes recent proposed legislation providing for the review of certain outbound investments and possible action the President might authorize independent of any action by Congress. This excerpt summarizes the proposed legislation and its status:

The House of Representatives passed the America COMPETES Act on February 4 as a counterproposal to the Senate’s US Innovation and Competition Act (USICA); it contains a provision, the National Critical Capabilities Defense Act, that would establish a National Critical Capabilities Committee (NCCC) headed by the Office of the US Trade Representative (USTR). The NCCC would be an interagency committee, somewhat similar to the Committee on Foreign Investment in the United States (CFIUS), that would review, and be empowered to block, outbound investment by a wide range of US businesses engaged in manufacturing or otherwise developing identified critical national capabilities. The reviews would be specifically focused on investment in a “country of concern,” which would include “foreign adversary” nations as well as “non-market economy” nations. Although China was certainly top of mind for the legislative sponsors, it seems Russia would likely now also be a focus.

The House bill defines “covered transactions” to include any transaction by a US business that “shifts or relocates to a country of concern, or transfers to an entity of concern, the design, development, production, manufacture, fabrication, supply, servicing, testing, management, operation, investment, ownership, or any other essential elements involving one or more critical capabilities” identified by the legislation, as well as any transaction that “could result in an unacceptable risk to a national critical capability.”

The bill further defines national critical capabilities as “systems and assets, whether physical or virtual, so vital to the United States that the inability to develop such systems and assets or the incapacity or destruction of such systems or assets would have a debilitating impact on national security or crisis preparedness.” In a nonexhaustive list of such capabilities, the bill includes such items as medical supplies and equipment related to critical infrastructure, as well as services and supply chains related to such items.

The memo reviews some of the implications of the implementation of outbound investment reviews, either legislatively or by executive action, and suggests that the most significant impact might well be the decision of other nations to implement a review regime of their own. In order to avoid disadvantaging U.S. businesses, the memo says that a coordinated approach to implementing such a system with other nations is essential.

John Jenkins